|
Functions
of
International
Finance
1.
Debt
Crisis
Effect
on
Banks:
International
Banks
were
the
victims
of
debt
default
of
many
governments
in
the
80s.
When
loans
are
given
to
international
finance
corporates,
they
can
be
forced
into
liquidation
but
not
so
in
the
case
of
the
Governments.
The
Banks
have
therefore
spent
time
and
money
to
reschedule
and
recover
the
money
in
installments
and
some
debts
are
written
off.
The
debt
crisis
weakened
the
banks
but
the
banking
system
didn’t
collapse.
The
banks
have
become
more
cautious
and
started
lending
only
to
countries
with
market
oriented
economies
and
undergoing
structural
reforms.
The
development
in
International
Debt
market
gave
rise
to
the
new
instruments
and
secondary
market
in
many
instruments
such
as
scrutinized
debt.
Debt
repaying
capacity
and
foreign
exchange
earnings
and
production
use
of
capital
are
all
taken
into
account
it
is
important
functions
of
international
finance.
2.
Corporate
Financing
Decision:
Another
important
functions
of
international
finance
is
foremost
decision
is
the
amount
of
debt
for
a
given
level
of
equity.
The
leverage
and
tax
deductibility
of
Interest
Payment
and
Debt
would
make
the
company
prefer
as
much
debt
as
possible.
But
debt
increases
the
risk
and
hence
there
is
a
trade
off
between
leverage
and
risk
because
of
the
debt
risk.
The
questions
that
any
Corporation
Management
asks
itself
are
the
proper
mix
of
equity
and
debt,
composition
of
debt,
show
medium
and
long
term
debt,
nature
of
debt
secured
and
unsecured.
Fixed
Vs
Floating
Debt
and
maturity
and
terms
of
debt,
what
currency
or
currencies
in
which
debt
should
be
taken
etc.
The
firm
should
keep
its
debt
should
be
taken
etc.
The
firm
should
keep
its
debt
at
the
optimum
level.
The
debt
should
be
self-liquidating
through
the
returns
that
it
generated.
It
should
be
in
currencies
in
which
it
earns
it
exporting
earnings.
One
should
borrow
in
currencies,
which
are
likely
to
be
weakened
and
depreciated.
»
Alternatives
to
Debt
Financing:
a)
Derivatives
and
Hybrids
in
financing
b)
Quasi-Equity
financing
debt
with
equity
Conversion
facility
c)
Debt
with
warrants
and
sweeteners
The
value
of
the
company’s
shareholders
will
increase
with
the
leverage
enjoyed
by
debt
but
the
risk
associated
with
the
debt
is
to
be
hedged
to
improve
the
value
of
the
firm.
3.
Capital
Structure:
The
Composition
of
Capital
Structure
influences
the
cost
of
Capital
and
returns
and
thus
the
shareholders
value.
The
composition
of
debt,
its
currency,
interest
rate,
maturity
and
other
terms
of
debts,
its
currency,
interest
rate
maturity
and
other
terms
of
debt
are
relevant
valuables
to
be
considered
Hedging
of
the
debt
risk
reduces
the
risk
of
financial
stress
and
even
crisis.
The
firms
have
to
match
the
composition
debt
to
the
payment
and
characteristics
of
the
assets
created
so
as
to
minimize
the
probability
of
financial
distress.
It
pays
a
company
to
deviate
from
the
maximum
risk
debt
composition
of
only
the
firm
can
beat
the
market.
This
mean
hedging
of
debt
risk
should
be
part
of
the
strategy;
swap,
caps
and
other
derivatives
play
a
role
in
different
ways.
a)
To
hedge
an
existing
exposure
of
the
Company.
b)
Hybrid
bonds
when
used
in
conjunction
with
options
and
other
derivatives
can
be
effective
way
of
getting
cheaper
funds
by
exploiting
the
market
imperfection.
c)
To
position
the
Company
to
gain
from
a
favorable
movement
in
some
market
valuables
such
as
interest
rates.
The
principles
for
deciding
the
Capital
Structure
may
be
set
out
briefly
as
follows:
A.
Debt
should
be
used
to
reduce
taxes
and
costs.
B.
Liabilities
created
should
match
the
assets
to
reduce
the
asset
liability
mismatch.
C.
Kinds
of
debt
should
be
such
as
to
suit
the
company’s
Inflows
with
Outflows.
D.
Foreign
Debt
should
be
less
costly
after
taking
the
hedging
costs.
E.
Once
the
forms
of
debts
and
types
of
financing
are
chosen
the
firm
should
employ
financing
and
hedging
techniques
that
achieve
the
goal
at
the
lowest
cost.
Related
Articles
Corporate Finance
Financial market
Bridging finance
finance and banking
|
